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Market Open Instability

The Decline of NBBO Stability at Market Open Leads to a Picture Perfect Chart 
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NBBO Fluttering and Instability

One of the hallmarks of a class of destabilizing HFT algorithms is the fluttering of the NBBO (National Best Bid or Offer).  Fluttering, is basically rapid changes in the NBBO spread (Ask price minus Bid price). Active stocks with good liquidity will have constant NBBO spreads: for example, the NBBO spread for SPY will maintain a 1 cent spread even during active trading. However, if certain destabilizing HFT algorithms run in a stock, the NBBO will begin to flutter, and within a single second, the spread may go from 1 cent to 2 cents, or 10 cents, or 20 cents or more. You can view examples of NBBO fluttering here or here or here or here.

There are multiple causes of NBBO fluttering such as: poorly written algorithms, gaming or confusing smart order routers, quote stuffing other algorithms or humans, exposing other algorithms, exposing buyer/seller interest, overwhelming the audit trail, stuffing exchange networks to slow updates for other symbols, and other explanations.

To look at the historic growth of NBBO fluttering, we processed 650 billion quotes over 1,516 trading days for U.S. Equities between January 1, 2006 and January 30, 2012, and for each second, counted how many stocks had a stable NBBO -- where the bid/ask spread does not flutter or change during that second. We divided the number of stocks with stable a NBBO by the total number of stocks with quote changes during that second to arrive at a percentage of symbols with a stable NBBO.

More on NBBO Instability.

The Decline of NBBO Stability for U.S. Equities during the first 19 seconds of every trading day between January 1, 2006 and January 30, 2012.

The chart below shows the percentage of symbols with a stable NBBO for each of the first 19 seconds of every trading day. Each day is color coded by age: older dates are colored towards the violet end of the spectrum and newer dates towards the red.

Note the very gradual deterioration of the number of stocks with a stable NBBO at the open (left side of chart). The colors of the lines create a near perfect rainbow as the percentage of stocks with a stable NBBO gradually falls from 90% to 35%. This is one of the most amazing and clear images we have produced.

(click chart for higher resolution)
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Publication Date: 02/01/2012

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